FINRA Investigations: U4 & U5 Disputes & Defenses

FINRA investigations relating to U4 disclosures and U5 terminations are explained by Rob Herskovits, a NY based securities lawyer with a national practice focused on helping financial advisors and broker dealers defend themselves and protect their rights, their assets and securities industry careers. Rob Herskovits focuses here on defenses in U4 and U5 based FINRA inquiries.

Hi, this is Rob Herskovits from Herskovits PLLC. FA’s often call me regarding disclosure that’s on CRD or broker check regarding a Form U4 or Form U5. And, it’s understandable that FA’s are very concerned with the impact that disclosure on CRD can have. The impact can be tremendous.

If you have a lot of disclosure items on CRD, you could have difficulty obtaining new employment. You could have difficulty receiving registration with any given state. And, often times, information that’s on CRD is the same information that FINRA or another regulator may look at as source material to open up an inquiry.

So, it’s really understandable why FA’s are very concerned about disclosure on CRD.

But, when folks call me, the first question generally is this, “Is the disclosure that you’re concerned of customer related or is it termination related?” So, if it’s customer-related disclosure that finds its way onto CRD, typically on a Form U4; so, let’s say a customer filed some bogus customer complaint, and that’s sitting there on CRD, and you want it off.

The process is somewhat labor intensive, and FINRA keeps making it more and more difficult for FA’s to obtain expungement of customer-related information on CRD. But, the essence is that you need to bring an arbitration claim in FINRA, either against the firm that filed the Form U4 or the customer himself or herself. And, it’s a fairly high hurdle that an FA needs to hit.

You need to be able to convince an arbitration panel that the claim was false. There’s a FINRA rule that’s on point and gives some guidance to arbitrators as to the types of factual findings that an arbitration panel needs to make, and needs to put into a written award, in order for expungement of that information to occur. But, the process doesn’t end there.

Once you have the award in hand, you then need to have that award confirmed in court and notify FINRA of your intention to do so. And, either FINRA can waive its right to participate in the court proceeding or, if they choose to exercise their right, they can even go to court and tell a judge, “No, we don’t think that this information should be removed from CRD.”

But, if an arbitration panel makes the requisite findings that the claim was truly without merit, often times FINRA will do the right thing and not seek to stand in the way of that information coming off of CRD.

But, now let’s talk about the other side of the ledger where the disclosure on CRD is termination related. And, what people often do is, they call me and they say, “Look, there’s been defamation made by my former firm. They’ve made a disclosure on a Form U5 which is untrue.”

So, one thing that FA’s don’t often understand is that in certain states, New York in particular, there is actually no such thing as a defamation claim in connection with a Form U5 disclosure. The highest court of the State of New York has said that, irrespective of what’s written on a Form U5, it doesn’t matter, that doesn’t make for a defamation claim, and there were some policy reasons behind that.

They didn’t want firms to feel that they were going to be second-guessed and dragged into an arbitration court under a defamation claim for putting information on CRD because the logic was that, from a policy perspective, it’s more important to have accurate information on CRD. And, they didn’t want to do anything which could add any sort of chilling effect on that.

But, not all states follow that, and that’s something that you’d need to consult with an attorney as to whether or not you work in a state which follows the New York standard on defamation of Form U5 disclosure.

But, whether you’re in New York or outside of New York, whether a defamation standard does or does not apply, one can still go to an arbitration panel and say, “Look, the information that the firm put on my Form U5 is inaccurate.” And, people call me almost on a daily basis with questions as to whether or not they should pursue a claim of that nature.

And, one of the first questions I often ask is, “Is the information on the Form U5 accurate? Is what the firm accused you of doing something that you, in fact, did?” Because, FINRA has really come down in recent years on firms to ensure that firms fairly and accurately make a Form U5 disclosure with regard to termination. So, you can’t go to an arbitration panel, really, and say, “Look, what they wrote was accurate, but I’m not happy with it because I’m having a hard time getting a job.”

But, what you see happen, with a fair amount of frequency, is that firms make disclosure on a Form U5 which is not accurate, and every once in a while, you’ll see examples where firms truly abuse the Form U5 process to, essentially, extract a pound of flesh or act in some sort of vindictive fashion against a former FA, and put something on there, which is either false or was not appropriate disclosure in the first place.

And, when you find yourself in a situation like that, certainly it makes sense to protect yourself and bring the arbitration claim, seeking what some arbitrators would call “reformation of a Form U5”. What others would call “expungement of a Form U5”. But, the bottom line, it’s, “The U5 language that’s on CRD is not accurate, and you, Mr. and Mrs. Arbitrator need to order that new and correct U5 language find its way onto CRD.”

And, the question of whether or not it makes sense to pursue a claim of that nature is really only one that the FA can answer. There are expenses associated with bringing claims like that, and there’s certainly no guarantee of any type of outcome.

But, often times, what people feel is that, they’re in their 20’s or 30’s or 40’s, and they’re going to be in the securities industry for many, many years to come, and they don’t want to have on CRD a disclosure regarding an employment-related issue which is not accurate, because that’s something that a potentially-employing firm can look at it at any point in time.

So, I’m certainly happy to discuss the specifics of your matter with you. Thank you for listening.